Monday, June 11, 2007

Let me save the bulls some time and say two things: first, I am jumping-up-and-down, wild-eyed, chart-crazed bearish right now. So if you want to take that as a marvelous contrary indicator, please do so. Second, I've even done some legwork for you. The call option on the S&P 500 for July at $1,625 (which, gosh, should be easy - that's only 7.5% higher than the current market) is a mere 40 cents asking price! The symbol is SPB-GE. Go nuts.

For the bears and my adoring fans: today's post will be more jaunty than usual.

Let me explain the title of today's entry a bit. First, by way of apology, let me say I've been Steve Jobs' Biggest Fan since before most of you people even heard of the guy. I've followed him since 1982, and one of the main reasons I even live in this area is because My Idol is here.

I think Steve's return to Apple in 1997 is one of the great acts of justice in human history. Displacing people like Michael Spindler and Gil Amelio - who have all the charisma of used shag carpeting - made the world a better place. And I used to be an Apple employee - number 9653 - back in the late 80s. So I've got no ax to grind.

But.

I also know that things run in cycles. And I also believe there is an inverse correlation between hype and results.

Take the Segway for example. Before this was introduced to the world, rumors flew around about Project Ginger (its code name). Breathless reviews from the likes of Larry Ellison and the aforementioned Mr. Jobs made people wonder what this miraculous creation was. I believe it was Jobs himself who said that entire cities would be designed around Ginger.

Well, they weren't. And won't be. The fact is, for all its hype, Segway has wound up to be little more than a curiosity. It still attracts attention. But most people gawking at a man buzzing about on a Segway are less interested in the mode of transportation than they are at the fact that the rider will probably die a virgin. At least, that's what I'm thinking. I'm a geek. But, Jesus Christ on a Biscuit, I'm not going to be riding around town on a Segway.

You know where this is all leading. That's right, the iPhone. Good God, I've never seen hype like this. You'd think that, given the price and hype, the phone would jump under your desk and pleasure you orally between calls. Two facts keep leaping to my mind. First, phones can be had for $9.99, far less than the $500 introductory price of the iPhone. Second, I don't know about you, but I've got a phone. And I'm pretty happy with it.

People are expecting the iPhone will perform miracles with Apple like the iPod did. It won't. Let's turn back the pages of time a bit and understand the iPod introduction better.

The first iPod was introduced early in October, 2001. This was not even a month after the terrorist attacks. People scoffed at the introduction. Call it anti-hype.....sort of the reverse of what we are seeing today. Here was this microcomputer company, which for years had sold multi-thousand dollar machines, entering the consumer electronics business dominated by low-end players like Sony.

Now, as you can see from the graph below, Apple's stock did pretty good after the introduction, but it faded back again, and it sank to even lower lows. The stock got down to something like $6.50 (don't you wish that time machine was handy, folks?) So the iPod clearly wasn't seen as any kind of savior for the company, nor was it the object of frenetic optimism.

So what happened next? Well, the Apple magic started to work. The brilliance of offering an accessible way to purchase music, great software to manage your music collection, and an elegant, highly mobile piece of hardware started to take hold. And Apple's stock moved up not hundreds of percent, but thousands of percent. The iPod made Apple more successful (and the stock more expensive) than ever.

Which brings us to today. Apple is deep into triple-digit territory. Steve Jobs would probably win the presidency of the U.S. if he ran. And there are thousands of Apple zillionaires running around Cupertino. The company seems like it can do no wrong. I notice even The Economist put Apple right on its front cover last week.

I took all this into account. And although I rarely depart from charts as my rationale for decision-making, I bought a bunch of Apple puts early this morning. And, as the market closed today, those puts were already up 35%. Not bad.

Now, it's not that anything horrible was announced from Apple today. Steve Jobs gave a talk at the WWDC, and everything seems pretty hunky dory. But if I can smell a top, folks, this is it. And I'm not predicting Apple will wind up like a completely devastated shell like, oh, Sun Microsystems. But if the contrary workings of hype have any merit, this has got to be one of the all-time great hype fades of modern history.

Phew. OK. Back to the markets. As I said earlier, I'm more bearish than normal. Which is saying something. Part of the reason is that, viewing the $SPX minute graph, I sense a sea-change has taken place in the trend. I've drawn it below.

I have acquired an ungodly quantity of Russell 2000 puts, predicated on the notion that the channel, drawn below, will likely be broken. And the beauty part is that if I'm wrong, I'll know swiftly, and my losses will be manageable.

I look at a chart of the $INDU below and get so excited I must excuse myself from standing for fear of embarrassing both myself and those around me. (In addition to generating pangs of jealousy amongst my bullish readers). To me, this is a chart jumping up and down, shouting "Top!" with great gusto.

Reducing the granularity of the chart to a weekly from a daily, we can plainly see the bearish engulfing pattern which took place last week. This week - Wednesday, Thursday, and Friday, to be specific - is loaded with important economic indicators. Here's hoping they shove the markets lower and help increase the minuscule bits of angst floating about into a growing sense of dread.

The S&P 500 weekly offers, to my eyes, similar conclusions.

Let's look at a handful of individual stocks. I'm going to get into a short position with Amazon (AMZN) tomorrow morning.

CAH, offered by a thoughtful reader, also looks like a sharp short.

As does CEG, also offered by a kind reader (and I do appreciate those emails and charts, folks).

Let's pause another moment and consider CROX. Let me say right now I am not short this stock, and I don't plan to be short this stock. I nibbled on some puts a couple of weeks ago, and I was promptly stopped out. I've learned my lesson. This is a momentum play, pure and simple. and I shriek like a little girl when I see this chart. No touchee.

We can compare CROX to a similar stock from many moons ago called Taser (TASR). Here's what TASR was doing back in the day. Check out the similarities of both price and volume action.

What happend to Taser after it peaked? Well, you already know that answer, don't you? Here's a percentage graph. Will CROX suffer a similar fate some day? I bet it will. I really doubt you can ply an ongoing competitive advantage off some cheap-looking fad-driven "shoes." But I, for one, am not going to guess when the momentum is going to run out. No thanks.

OK, back to shorts. Entergy (ETR) is a good idea to consider. And remember, folks, these are just ideas. Read the top of the screen. None of this is advice. I'm just spoutin' my feelings and notions. So settle down.

I mentioned GOOG as a long idea. Ya know what, I've changed my mind. I think I might buy some puts on this one, mostly for the same reasons as Apple, although not nearly to the same extent. I see a failed breakout happening here. Maybe.

And if you think the energy/oil run has gone berserk, Exxon Mobil (XOM) presents a relatively low-risk to play this on the bearish side.

That's it for the day. If the week rolls in my favor, you can expect more videos and such. Until then, please think about what I've said above. I'm right from time to time.

That was just a funny post through and through, had me cracking up quite a few times. Quick Q. for ya- do you consider this week to be on the stagnant side due to OPEX? Or do you believe that in this particular case it will not have much of an impact. Recently the opex has had a bullish lean and we got analysts repeating that fact as if it were their job. I dont even know if its true, since every week has had a bullish lean to it. I am also asking because I decided to push my luck today and buy June puts, but am now regretting the greed.

Looking at the weekly chart of GOOG I see a very long-term negative divergence between price and momentum indicators such as MACD & RSI starting late 2005. The near-perfect LT trend is still intact, but do divergences of this magnitude tend to point to the probabilities in favor of significant price declines? I'd appreciate your thoughts thoughts?

Watch the horsemen goog, amzn, aapl, and rimm, they are losing momentum. it is time to short the market, short, short, short...

today's post is one of the best I have ever seen.

"I look at a chart of the $INDU below and get so excited I must excuse myself from standing for fear of embarrassing both myself and those around me. (In addition to generating pangs of jealousy amongst my bullish readers). To me, this is a chart jumping up and down, shouting "Top!" with great gusto."

"how do you place a price target on something such as aapl if the outlook is not based on the chart?"

A fair question! The target price would still be based on the chart. At this point, I'd say a target of the high 90s. But charts change over time, and the closing point could get cleared over time.

As for OPEX, I'm sorry, but I don't even know what that is!

John, as for GOOG, I haven't looked at those indicators on GOOG, although your rationale sounds perfectly sound. The main thing I'm noticing is that a handsome looking breakout is looking awfully limp.

Before I opened your site - I wrote my girlfriend and told her that I watched a market (all day) that was struggling with its own excesses (it was a different feeling today) I wasn't even worried about shorting RIMM when it was near its top today...RIMM has always scared me.

I know waht you feel like ...it is only every once in awhile you can be feeling as sure about the market as you are ...last July/ August I could not contain my Bullishness and had to scream out BUY BUY BUY and no one would listen and again in March I was standing on the rooftop beating my cheast buying calls like they were candy. I appreciate your work more and know that a 10% drop that you will likely get will be worth just as much monetarily as it will in ego !!! I know the money does feel good but being in this business it is pretty nice to say you called it while others didn't but I have called for a Bear market and have called this the last leg for several months and my members have heard me say daily that this has the 1987 feeling all over again ..and I wrote the same in your comments ...we sold on the rally today and bought more DXD 2x ultra short and plan on exiting our other positions to get 100% short using puts and ultras. No one desewrves it more than you taking ridicule from Bulls 5 years straight including me ..but I believe I have been fair , honest and professional and hope that it stays that way because as you know ...after this FAll will be another Bull market and we may go another 5 years with just a correction eveery 6 months !!!

Congrats ..I agree with your call and hope you make every last dime down to 45.50 QQQQ and then I will start buying long again.

Gotta believe that the i-phone is a royal piece of crap, and a $500 one at that. Don't see any support for AAPL till we get to Par or a bit below. I'll take 20-25 points any day.The XAU is just bouncing up from the lower trendline that frames the ascending triangle it is in - another bad omen for the markets. I'm with Tim here - perhaps all the stars are about to align.The S&P is stalled in the congestion area around 1510. Look for a retest of the recent lows @ 1495. Seems a sure bet that no serious buying can occur unless and until we have bounced from there. Lots of key economic data this week as well as the brokers reporting - this market seems poised to head lower and any excuse will do. Muted earnings outlooks by GS, LEH, BSC (i.e. a slowdown in M&A activity) could be such a catalyst. For now, we are short-term oversold on the index and still bouncing up. Expect some buying that could get us up to 1525 or thereabouts (and that may take a few days or even into next week) and then Whammo! - bears move in for the kill.

You know there is a very distinct possibility that the next bull market we will see might be in many years. This 5 year old bull market has an expiration date and the economic landscape will dramatically change in the next year or two.

sigh...Chart patterns have no statistical proof that they improve the odds of a profitable trade. Hasn't this been made clear by repeated attempts to call tops because of certain patterns. I'm curious how the action this past week is so much more conclusive that the bull market is over than say the Feb. 27th decline. If in fact you are loaded with puts then you're are making a typical novice mistake and ignoring your risk management. Successful investing is and always will be about managing risk not whether one is right or wrong. Jeesh some of the things that get posted here are just ridiculous.

I have been following your blog for about 6 months and this is one of the best posts yet! I am also in the bear camp and have been there for awhile. I couldn't agree with you more about the iphone. Thanks for sharing your wisdom and humor!

Gary,I would argue that chart patterns are very reliable. There is not a "pattern" that calls a top, that is just a hunch based on one persons interpetation of weak market action. I think that for the most part there is a huge difference between waiting for confirmation and just trading from a gut feeling and a few indicators.

I think TK shows a style of getting in early often and that might be what works for him. Don't let adjectives like "loaded" let you assume that he forgot risk management.

Ultra-bear Tim, short like he's never been, and ultra-wrong Tom, the guy boasting turning 21K into 231K in less than a year but can't prove it, are now both on the short side. This is the ultimate signal to buy every dip this week and go 200% long with QLD. Never been so crystal clear to go long. The Tim and Tom long signal. Thanks guys!

Jack Schwager found that there is no evidence to support that chart patterns improve the odds of an investor making a profitable trade. By trading soley on chart patterns an investor is basically making a coin flip. A coin flip is not a very profitable way to invest as can be attested to the bear side being wrong for 5 years now. If Tim were to say that he initiated a tiny short position anticipating that the market was ready to decline then I would think here is a seasoned investor testing his gut feel that the market is ready to decline. However when I hear that he is "loaded" with puts after the S&P was only down 1.87% last week, I see a novice investor who wants to blow out his account. I also see many newbies here looking for confirmation of their beliefs and when they see Tim massively short then they load up too. There by guaranteeing that they won't be around long. Some posts on risk management might improve the odds of your fans remaining in the market longer than a couple of months. Even if an investor is 100% correct in his calls if you don't control your risk you will blowout your account, I guarantee it. BTW if Tom actually is up 10X in a short period then he also is not using correct risk management and will soon be gone, unless he starts.

Tim- Glad to see that you did revist Appl and Crox. Even happier to see that you made money on Apple too! Crox may be a little stronger than appl but it's time will come too...Patiently waiting for that time to come. Happy to see your bearish conviction. Welcome back!P.S. Tasr was revolutionary. I'm not sure that holey plastic shoes are?

Actually, I agree with you about portfolio management and risk control. Look no further than someone like Victor Niederhoffer - - - you can be an amazing trader, but if you don't control your risk, you can go from a zillionaire to a pauper overnight.

Where we do not agree is the value of technical analysis. But that's OK. We can agree to disagree!

"Take your profit on those AAPL puts Tim. You will not regret it. Time to go LONG!!!"

Ah, my bullish friend, you have recognized the true advantage you have, which is this........

If I am wrong, and AAPL soars on to new heights, I get to face an audience of thousands of people with this humiliation. And people like you will post comment after comment, hands aloft, celebrating your prowess and the idiocy of the bears.

But if AAPL gets clobbered, you won't even show up. Or at least, you won't make a post admitting the error of your ways.

Not a bad deal! I've got a pretty long memory, though, so I might recapture some of these comments later, just to save the bulls the trouble.

That's the beauty of being of blog poster compared to a blog author, isn't it?

But I have no problem admitting my errors. And you I recognize that you don't either which is great.

Here's what I got:

Oct 120 calls at 12.00.

What do you have?

May the best return win when both our positions are closed. I'm no daytrader for your information so I will not care if you boast in 2 weeks that you made few bucks on your trade and will wait to see what my trade will bring.

The thing about AAPL is that the buyers of their products are not buying just on features, they are religious fanatics about Apple products. The iPhone will be a fashion craze as much or more than just a product. My own kids started with MP3 players then when one got an iPod, they all had to have iPods even though the MP3 players were perfectly capable devices. Their friends all have them and that is just so much of the craziness of peer pressure and wanting to be like everyone else.

That is one nice thing about being a Geek on a Segway--who cares what the rest of the world likes, they can have Red Hat Linux and a DOS machine or two for grins when no one else understands or cares!

Many of those lemmings will buy the iPhone just because it is Apple and they will be able to consolidate their devices, too.

So Tim, I humbly think that it is high time for one of your famous jpegs of your positions and review of where your stops are. A few months ago when you published your stops, I charted them as notes on my Prophet charts and find their reminders interesting as the prices danced around many of them.

NOTE: I love that I can press Ctl-S to lose the chart lines, could you please de-couple the Notes as a separate Ctl-N to lose the Notes without losing the lines? How much code would something like that require?

Thanks for your service to our community. I for one appreciate your thoughts. They help me hone my own...

To the sky, Philippe. Sure could go test 110/115 before it goes higher but if we hang on, and I intend to, these AAPL calls will turn Tim into a believer. And I don't even like that company by the way as I hate to pay any hype premium to buy a product. Can read a chart though and this company never stops to innovate. Good luck to us!

Ok, complete disclosure : I own 120 contracts.This is the reinvestment of my profits on the Jul 85 and 95 calls (QAAGS and QAAGQ). I just wanted to buy more time (and lessen my exposure) until the full iPhone effect could be appreciated. With this, I mean the synergetic effect with the rest of Apple products.Damarketman : I do love Apple, so I'm certainly hanging on.

Symbol : APVJE and I bought them at 12,75 (said that in the first post).My stop-loss is 105, since this is the reinvestment of profits that I gained on the other calls. Oh and BTW, I've been in Apple since they traded for 29$.

LOL, I love Segways.Concerning the iPhone, the most important thing about it is the software. Jobs has always known this. It's the software that counts. By putting a full-blown MacOsX on it, he trumps the competition. Why do you think he doesn't just open it up to developers? He would give away the biggest asset : security and stability (and ease of use) of MacOsX.Now just sit back, relax and imagine the synergies that could be when you start combining the iPhone with let's say Apple TV. Need I go on?

Would you please do a post on how you manage risk/manage your trades? I think it would be very interesting to your readers to hear some details as to the general strategy that you employ, especially regarding options.

I noticed from above that you use a contingent stop based upon the underlying, so I imagine that you must monitor them and avoid hard stops.

Options are very dangerous for amateur investors, and from what I can tell, there seem to be a few of them out there in the blogosphere, so you may be saving a few accounts. Who knows.

"On another subject, I'm surprised you don't see the 1/2 H&S in ONT though. $2 is a possibility and then $1.50 when that line fails."

I am a p*ssy of a bull. I sold my 9,000 shares this morning at $2.83. I just couldn't reconcile a long position (especially in a microcap stock) given my general market outlook. I made a few hundred bucks, so - like the kids say - it's all good.

On the subject of AAPL, while there is a lot of hype surrounding its iPhone, one needs to realise that AAPL is growing earnings by 40% + every quarter even without the iPhone and is expected to grow at 25-30% into the foreseable future yet it trades at a PE of under 40. So for AAPL to decline either some catalyst needs to occur to drop the multiple and thus share price or we need to enter a major bear market in which case a drop in AAPL share price will make it a screaming buy. On the other hand, if analysts give AAPL a 50 multiple which it deserves, than the share price will likely rocket north of $160.

VNO worked well for me today along with virtual volume tipping me off to CAL first thing this morning. I bought puts on the cubes first thing out of the gate and they did nothing for me all day. Great Day though.

Damarketman, and don't forget that the volume was up quite seriously : 50.778.095 shares traded.Although WWDC was a 'disappointment' for some daytraders and made aapl go down 3,5%, I suspect a lot of them are sorry they sold then.

DARKMARKETMAN ....Hvae you no respect ...try to be human for a minute and realize a lot of work goes into this. Tim doesn't jusr prance around web sites calling people names ..fact is this was a perfect call and the rewards from that should be #1 Money #2 Respect ...when anyone is passioante enough about anything to stick their Kahunas out there like we do everyday for cretins like you to pick apart ..well Tim deserves a ton of credit not only for his call here but providing lowlifes like you a place to get free information even though you are too stupid to use it ...maybe you will call someone from your I-Phone who cares about AAPL right now ...but don't let the battery run out or burn your leg on the way !!!

Tim and I do not agree on alot of things and he may not even care for me or my site but when you get to a stage in investing where you know exactly where the market is going to go ..it is a pretty good achievement and deserves a lot of respect.

Tim has my respect. Doesn't mean he can't be a good contra indicator like any perma bear. As for you sir, respect will be given when you prove on your site that you turned 21K into 231K in less than a year. And please don't tell us to read your posts. Show us your monthly statements, nothing else. I bet you won't.

I'll point out to the bears that this decline seems to be totally dependant on interest rates continuing to rise. Bonds are severely oversold. I don't see this decline continuing if bond rates start to moderate. I don't think I would be willing to short willy nilly under the assumption that bond rates are going to just go straight up from here. BTW nothing goes straight up or straight down.

Some humans take this market seriously and others as a sideshow. I choose to take it seriously and work extremely hard to make it easier to understand for others. Plus I think when people are investing and putting hard earned money on the line everyday ..it shouldn't be a huge joke and it should betreated with some respect. Tim has made a great call in here and it needs to be noted ...plain and simple.

Tim Knight founded Prophet.net, considered by Forbes and Barrons to be the #1 technical analysis site (sold in early 2005 to INVESTools, where he is the SVP of Technology now). Tim has been trading actively since 1987 and focuses mostly on option positions. He is a dyed-in-the-wool technician, leaning heavily on marked-up charts for his analysis. The contents of this blog are NOT to be considered investment advice, and you should know Tim may or may not have positions in the securities mentioned here.